FCA Publishes Market Abuse & Manipulation Update
In the wake of recent market volatility, the Financial Conduct Authority has published an update on their approach to market abuse and manipulation monitoring and enforcement.
This update is the latest in a recent run of published statements from the regulator on the topic of trade surveillance and market abuse detection. In May 2022, the FCA highlighted the importance of conditional parameterisation when testing for market abuse in their Market Watch 69. A month prior to that, they published a three-year plan promising to be tougher on firms operating in the UK.
With this recent flurry of activity, the regulator has come under pressure to clarify their specific approach to market abuse - a fact which no doubt prompted the publication of this update.
The FCA’s Approach to Market Abuse Monitoring
The update begins with a detailed look at how the regulator monitors for market abuse and manipulative trading. It states:
“Ours is a data-led approach. We undertake daily monitoring to ensure the timeliness and accuracy of the disclosure of inside information. Firms and venues send over 30 million transaction reports and over 100 million order reports a day, which are analysed by our market data processor. This processor is a source of regulatory sunshine that allows us to oversee the market in close to real time, with dedicated software and algorithms to detect potential issues.”
They continue by stating that this data is supplemented by the 90+ weekly STOR (Suspicious Transaction and Order Reports) that are submitted by financial firms. These reports are then analysed by the regulator’s specialised analysts in order to determine whether or not abusive trading has taken place, in which case further disciplinary action will be taken.
The update argues that the publication of their oversight work is a necessary element of improving the quality of STORs - by highlighting the shortcomings of submitted reports in their Market Watch newsletters, the FCA hopes to encourage better practices being followed by financial firms when it comes time for them to submit Suspicious Transaction and Order Reports.
Legal Action and Criminal Prosecution
The latter half of the update shifts away from methodology and places the focus on how the FCA will pursue legal action in instances where abusive trading is found. The language used in this section is strong and promises swift and comprehensive action in response to market abuse.
Criminal prosecution is highlighted as one of the regulator’s “tools” when responding to market manipulation. They write that they have already been to court once this year, with four further cases set to have decisions made by the start of 2023.
The regulator takes care to emphasise that, while criminal action is one of the “tools at [their] disposal”, it is not the only one. In particular, they mention pursuing civil cases which require a lesser standard of proof, and working with other international regulators to disrupt abusive trading across borders. They highlight that the latter of these two approaches has recently led to collaboration between the FCA and the DFSA in Dubai, the AMF in France, and numerous US regulators, all of which led to action taking place.
The Importance of Deterrence
The update concludes by stating the importance of the regulator’s retaliation against market abuse, not only for the sake of legal action, but for deterring future would-be abusive traders. The regulator defines their approach as a “blended approach of prevention and deterrence across all forms of market abuse” which “involves the collective efforts of approximately 90 enforcement staff supported by dedicated specialist intelligence, legal and cyber resources, as well as [their] primary and secondary market oversight teams”.
The FCA’s hope is that this recent uptick in legal action being taken against abusive traders, as well as the increased publicity being given to this effort by the regulator, traders will reconsider engaging in abusive trading. They close with a simple message: “those considering attempting to manipulate our markets should be on notice that we will not hesitate to act”.
